Understanding the crude-oil economics
The oil and gas sector is among the eight core industries in India and plays a major role in influencing decision making for all the other important sections of the economy. India imports 86 percent of its annual crude oil requirement. According Petroleum Planning and Analysis Cell (PPAC), India imported 219.15 million tonnes of crude oil in 2018. Since the payments are made in the US dollars, India’s deficit will depend on crude price as well as on the USD/INR exchange rates.
Other major crude oil importers are China, Japan, South Korea etc. but India’s crude oil consumption at the moment runs at the fastest pace due to higher population and increase in spending ability. Considering the ongoing turmoil in global crude oil market and India’s dependency on imports any rise in crude price will have a negative impact on the fiscal and current account deficits of the economy. Increase in these deficits will lead to higher inflation and also impact monetary policy, consumption, and investment behaviour in the economy. End consumers are also to face the brunt as it is widely used in various forms like petrol, diesel, aviation fuel, and it’s usage in several other consumer products like cosmetics, paints, rubbers, etc.
In 2019, crude oil prices gained more than 25% until now, having said that the prices in 2019 and beyond would be determined by President Donald Trump, Vladimir Putin and Crown Prince Mohammed Bin Salman as the U.S. now is the biggest oil producer in the world, pushing the leaders like Saudi Arabia and Russia behind. Though with OPEC, Russia and some other oil producers joining in with 1.3 mln bpd day cut from January 2019, their clout would be back as OPEC contributes up to 45% of the global supplies.
However, the Energy Information Administration believes it isn’t good for customers to see a barrel go above $85 dollars or fall below $55 dollars a barrel. Going ahead they hope to see calmer shores, unlike last year.
Although government policies or geopolitical factors are not in investors control, they can manage price risk exposure by hedging on exchange platforms. Hedging crude prices using crude oil futures or options contract would be a smart strategy to tackle high crude price volatility and safeguard the bottom line against any adverse price movement. Though you must keep in mind hedging either moves in favour or against the hedger.
MCX offers crude oil futures and options trading platform to hedge against volatility to safeguard your portfolio.